Q&A:
Anshu Jain
The London-based Anshu Jain, Head of Deutsche Bank's Global Markets
division and member of the bank's Group Executive Committee, was
in Mumbai for a day recently. He spoke to BT about trends in global
debt markets, banks' appetite for coprorate risk, derivatives and
the implications for India.

IT services, media, healthcare, cement-it
doesn't matter which sectors they come from. Tomorrow's leaders will
not necessarily be those just dabbling in high-growth areas but those
that are able to create wealth.

By Brian Carvalho

If
you think you're a guru of new-age sectors-and there are quite a
few of them out there, most self-appointed of course-try figuring
out which 'hot' industry we're talking about here: A reputed consulting
firm has estimated its size at Rs 10,000 crore, growing at 30 per
cent annually. Required: high-tech equipment, and highly skilled
people. It comprises thousands of bit-players all over the country,
mostly unorganised, with only a handful of established majors, some
of which are trying to consolidate the industry via acquisitions.
Multinationals like Speciality & Gribbles (okay, we've started
dropping names to make your task easier) entered the business, via
joint ventures with Indian companies. The biggest US company in
this business is Quest Diagnostics which, via a string of acquisitions,
has become a $5-billion colossus, and is today one of the more exciting
mid-cap stocks in that market. Indian companies that are trying
to make a mark in this highly-fragmented business include Ranbaxy,
Dr Reddy's, Nicholas, and Metropolis Health Services.

Right, we're talking about the pathological
laboratory business here-unglamorous perhaps but harbouring enough
potential for growth and return on investment to put to shame many
of those hanging on for dear life to the hype bandwagon. But wait
a minute: Don't get taken in by the whopping size of this industry:
It means little, given that the industry is so highly fragmented.
Metropolis, for instance, founded way back in 1981, boasts a turnover
of Rs 35 crore, and a valuation of Rs 50 crore. The good news for
Metropolis' Chairman, Dr Sushil Shah, though, is that the opportunities
for consolidation are enormous. He believes that some time down
the line there will be just a handful of reputed names in this business,
just as in the US where most of the mom 'n pop labs-some 22,000
of them-have been either gobbled up by the majors or just forced
out of business. Instead, just about a 100 established players rule
the roost today. Shah is hoping to follow suit: Via acquisitions
he wants to up sales to Rs 100 crore in two years, and valuation
to Rs 200 crore, after which he will consider roping in a strategic
investor to fuel further growth.

The New-Age Areas Need to Ramp
Up Rapidly to Climb up the Valuation Sweepstakes

Balaji Telefilms:
Expects heady growth of 60 per cent in its revenues and 90-95
per cent in its profits. But its business model is limited,
and it will have to look to acquisitions to scale up.

Rank

Market Cap

Net Profit

92

541.77

29.02

Panacea
Biotec: Being small works in favour of biotech companies,
yet this company has immense potential to spurt in terms of
revenues and valuations once it's in a position to outlicense
molecules to global pharma majors or is able to grab contract
research opportunities from them. It won't happen tomorrow,
though.

If you're wondering what's the point of starting
out a feature related to BT's list of 500 companies ranked on basis
of market capitalisation with an arguably obscure, unorganised industry
that boasts no listed players, read on. The pathological laboratory
sector, like media and entertainment, hospitals, biotech, BPO or
any other Next Big Thing, doubtless boasts a huge potential for
growth. But first these businesses need to scale up. And one way
that process could happen is via consolidation. "Many of these
sectors-biotech for example, which will call for sustained R&D
spending-need to scale up or they will die after 10 years,"
points out P. Krishnamurthy, Vice Chairman, JM Morgan Stanley.

That's the challenge for most of Emerging India
Inc today, be it a Balaji Telefilms, or a Panacea Biotec, or an
Apollo Hospitals-even as Balaji keeps scoring big points on the
innovation and quality fronts and grows its topline at a mind-boggling
60 per cent, it has to expand its current business model (software
production) to leapfrog into the next league. In biotech, small
may work to the advantage of such companies that depend on a small
pool of highly-skilled scientists to find cures for hitherto untreatable
diseases or ways of increasing the human lifespan, but how do you
sustain the research expenditure? Answer: scale up, by offering
contract research opportunities to global pharma majors, and outlicensing
molecules to them for further development.

Some CEOs may decide they don't need to grow
in terms of market valuations, but then they have little choice
but to fund their own growth plans (rather than investors getting
into the picture), which few Indian entrepreneurs can realistically
consider. The other option is to bring in a foreign partner, but
the danger here is that you may no longer be in the driving seat.
Consider the case of Jayesh Choksi, Chairman and Managing Director
of Gufic Biosciences. In 1997, Choksi sold 5-6 of his pharma brands
doing sales of Rs 100 crore. He decided that being a pharma company
was going to be difficult post-2005 in the products patent regime
as he felt that the opportunity in the US generics market wasn't
sustainable, a JV could go sour, and he wasn't going to risk five-to-10
years of R&D effort on drug discovery. "But I still want
to create intellectual capital," says Choksi. He's doing so
by venturing into the relatively less research-intensive sector
of agri-biotech.

The IT Services Sector Is At The
Crossroads, With Companies Having to Redefine Their Positioning-Fast

Mphasis
BFL: Bucking the slowdown in IT services, on the back
of rapid growth by BPO subsidiary MsourcE.

Rank

Market Cap

Net Profit

66

894.94

49.34

Infosys:
Amidst high billing pressure, it is benefiting from a
pick-up in offshore outsourcing by its clients, even as it expands
its client-list and aggressively growing its verticals business.

Rank

Market Cap

Net Profit

4

22,967.08

807.96

But the problem for Choksi is that after selling
his pharma brands, he's lost on on size (in the first year after
the sale, he had a turnover of just Rs 21 crore). As compensation,
he's diversified into the fmcg business, which would have management
gurus frowning. But Choksi has little choice: His hybrid seed business
could be a winner in the medium to long term, but till then he's
got to grow-in two and a half years he aims to hit a turnover of
Rs 100 crore, up from Rs 37 crore in 2001-02. That's imperative
to attract private investors, who in turn could help fund his R&D
efforts in agri-biotech.

Growth is Fine, But Returns?

To be sure, being in a high-growth industry
is just the beginning, and just not enough. What will separate the
men from the boys is the ability to create wealth, which means earning
returns that are higher than the cost of capital. Growth on its
own means nothing. Rajeev Gupta, Executive Vice President of DSP
Merrill Lynch, points to the example of the fertiliser sector: huge
growth potential, given that more and more farmers are using fertiliser.
Problem, though, is that the country is just not competitive to
make fertiliser since naphtha and gas costs are too high. Result?
No value-creation in this industry.

Krishnamurthy points out that tomorrow's leaders
will be those who are competitive, independent of sector, country
or markets. For instance, software services is still a high-growth
sector, at 20-25 per cent, but it's only companies that can reposition
themselves away from the commodity pack-as providers of it-enabled
service, business process outsourcing, offshore outsourcing, end-to-end
consulting, you take your pick-that will last out the long term.
"Sustainability coupled with reliability of business model
will determine leadership over the long term."

Consolidation And A Global Recovery
Could Help Propel India's Commodities Majors Into The Global
League

Reliance:
Stranglehold on the Indian petrochem sector, thanks to a series
of acquisitions, the latest being the state-owned IPCL.

Rank

Market Cap

Net Profit

3

28,350.92

2,814

Hindalco:
Has beefed up its status as an aluminium giant with the acquisiton
of Indal. Nalco would be another feather in the cap

Rank

Market Cap

Net Profit

18

4,950.74

686

Gujarat
Ambuja Cements: Its 'strategic alliance' with ACC and
future acquisitions could make it a contender for the top slot.

Rank

Market Cap

Net Profit

26

2,941.25

186.52

Sterlite
Industries (India): Rapidly emerging a metals maverick
(copper and aluminium), helped by a string of takeover, including
Balco, Malco and Hindustan Zinc.

Rank

Market Cap

Net Profit

72

761.09

120.92

Grasim:
The proposed acquisition of Larsen & Toubro will make the company
India's largest cement manufacturer by far.

Rank

Market Cap

Net Profit

27

2,858.49

302.96

Average market cap and net profit
for H1 2002-03 in Rs crore

Gupta of DSP Merrill Lynch adds that competitveness
will be driven by companies that can achieve income and demographics-induced
growth in the local markets (for instance, two-wheelers that more
people can afford, thanks to higher incomes, and education, where
there has been a demographic shift, with close to a third of the
population being under 13); also competitive will be companies that
can sell products and services globally on a sustainable basis (pharmaceuticals
and software services).

Clearly, the BT 500 listings in the years ahead
will undergo plenty of changes. None of the inclusions and dropouts
will be determined by collective high-growth sectors but rather
by individual companies in these sectors with the ability to create
wealth, be it an it firm or a commodities player. The services sector
will doubtless have the edge, the proof of the pudding being Wal-Mart's
accession of the No. 1 slot in the Fortune 500, a position that
has been held by General Motors for much of the past 45 years. As
a sector on its own, the meat and potatoes market may not be as
big as say the IT industry. But then again a Microsoft or an Intel
won't reach the $200-billion revenues Wal-Mart is expected to earn
this year. None of these companies boasts that scale.

In India, retailing is still a long way off
from reaching the scale of a Wal-Mart, with most of the players
still not national, and not listed. But don't rule out the possibility
of companies not represented in the BT 100 or BT 50 today finding
their way into that elite space. It could be a media group, or pharma
firm, or even a cement conglomerate-those that either scale up their
business model, or consolidate their position in the industry via
acquisitions, or those that do both. For, don't forget, as an author
had pointed out, a third of the companies listed in the Fortune
500 list of 1970 weren't around by 1983. They hadn't disappeared.
They'd been either acquired or broken into pieces.